Farming out R&D

According to a new report from Datamonitor, 44% of mid-pharma’s revenues in 2005 were from products discovered outside their own pipelines.

By Editor on Sep 5, 2006

According to a new report from Datamonitor, 44% of mid-pharma's revenues in 2005 were from products discovered outside their own pipelines. And considering only deals already in place, revenues from products discovered by external sources will reach 49% by 2010.

The group includes companies with less than $10 billion in ethical revenues in 2005. The Big 6 of this class, with more than $4 billion in revenues each, includes Boehringer Ingelheim, Schering Plough, Novo Nordisk, Bayer, Schering AG, and Merck KGaA. But the merger of Bayer and Schering AG will propel the new company into Big Pharma, leaving just a Big 4 in the mid-sized class. The group also includes some smaller companies, with revenues of about $1 billion, including companies like Lundbeck and Schwarz that specialize in the central nervous system and cardiovascular markets.

As a whole, mid-sized pharmas generated $66 billion in ethical sales in 2005. And Datamonitor predicts growth within the class will be nearly 5% until 2010, outstripping predicted Big Pharma growth over the same period. Although Datamonitor analyst Brett Scottorn says addition externalization by mid-sized pharmas could boost the group's growth rate even more.

Most in-licensing deals are for the right to develop and market the drug, which gives acquiring companies a greater share of the financial returns. But mid-sized pharmas also are brokering distribution and product acquisition deals. Scottorn says distribution agreements make sense for companies seeking to access a territory with significant barriers to entry, while acquisition agreements are useful for expanding in a new direction.

Dealing with mid-sized pharmas has its advantages for small discovery companies, Scottorn says.

Compared to Big Pharma, mid-pharma companies tend to have a narrower focus in a particular dimension often in terms of therapy or geography, he says. By selecting a mid-pharma partner that specializes in the same therapy area/geography as the product, the source company is maximizing its chances of commanding a higher price, because the partner company should be able to pay a high price and yet still extract value for its shareholders by exploiting the good fit/synergy that the product offers.

Scottorn says that while some mid-pharmas, including Forest, King, Menarini, Shire and Aimirall rely heavily on R&D externalization strategies, the Big 6 generally have a more balanced approach between in-house R&D and sourcing products externally. Others, including Lundbeck, Akzo Nobel, Altana and Servier, rely more heavily on their own in-house R&D, he says.

But with two-thirds of absolute revenue growth for mid-pharma between now and 2010 coming from externally sourced products, externalization strategies will remain vital to the continued success of the mid-pharma peer group, Scottorn says.

The story is really no different for Big Pharma. Earlier this year, Datamonitor reported that the number of licensing deals signed by top-20 pharmas has risen 16% in the past five years. And the big companies are becoming increasingly dependent on licensing to generate sales, with an average of 19.5% of their ethical sales being derived from licensed products in 2004, up from 17.5% in 2002.

In 2004, $63 billion of Big Pharma's sales came from licensed products, compared to $48 billion in 2002 a difference of nearly one-third. In fact, Nature Biotechnology magazine reports that biotech companies account for more than 40% percent of all discovery-stage candidates.

And Datamonitor forecasts an increased dependence on licensing over the next five years among the top-20 pharmas, with Roche seeing the greatest increase as a result of its relationship with Genentech. In fact, the group predicts Big Pharma will reap 26.1% of its ethical sales from licensed products by 2010. That's more than $100 billion in sales or double what top-20 pharmas generated from licensed products in 2002.